How to get funding for starting a business

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Trying to find funding for starting a business, particularly without using a bank loan, can be quite complicated.

However, there are government initiatives out there, as well as other soft loan and grant opportunities, to help you kick-start your businesses.

Here is MoneyMagpie’s guide to these often quite confusing loans and schemes.

• The Start Up Loans Company
• New Enterprise Allowance
• The Prince’s Trust Enterprise Programme
• Angel Investment Network
• Funding Circle
• Borrowing from family/friends
• Crowdfunding
• Starting a Social Enterprise

 

The Start Up Loans Company

The Start Up Loans Company is a government funded initiative, which aims to support people starting a business in the UK. The scheme offers a repayable loan and out them in contact with a business mentor.

What is on offer?

Money

The company offers loans of up to £25,000 to give you a much-needed boost. The average loan size is £7,200 but the company lends on the basis of each individual business’s needs. There is a fixed interest rate of 6% and the loan must be paid back within one to five years.

Mentorship

The scheme also provides you with one-to-one mentor support. These mentors will be invaluable when you start your business, as they’re industry experts.

Where possible, mentoring is delivered in a face-to-face environment – whether it’s in a cafe, library or co-working space. If there are regional restrictions, mentoring is offered in via Skype, telephone, or email. Over the course of your first year in business, you will receive 15 hours of mentoring with six hours exclusively set aside for the first three months.

You’re encouraged to make the most of your time with the mentors and ensure that you plan for your meetings to get the most out of them, as these mentors are passionate about supporting entrepreneurs. Read more about the mentoring part of the scheme here.

Exclusive offers

You’ll also receive a range of exclusive offers once you’re on the scheme. For example, you can receive free legal advice, discount on workspaces and consultations.

Who is eligible for a start-up loan?

To be eligible you must:

• be 18 or older
• a resident of the UK with the right to remain in the UK for the duration of the loan term and the right to be self-employed
• be based in the UK
• already have your business up and running, but trading for less than 24 months
• be unable to secure finance from other sources
• pass the relevant credit checks and be able to repay the loan.

Important note: You can not get a start-up loan and a New Enterprise Allowance at the same time. However, you can apply for a start-up loan if your business needs more funding after the NEA, but it must be used to pay off the NEA loan. Check out the full eligibility criteria here.

How do you apply for a start-up loan?

To begin with, you must complete a basic registration form. You’ll need to give your company’s contact details and the business sector you hope to work in.

You’ll then be assigned to a delivery partner (an organisation with experience in supporting businesses) who will help you build up a business plan. Your delivery partner will then decide whether you’ll receive funding. They’ll be looking for confidence, a good business plan and a good understanding of the figures.

Then, you’ll need to complete an application form to help them understand your personal situation. At this stage, they Weill run a credit check to see if you can make the repayments.

Finally, you’ll need to provide a business plan including a Cash Flow Forecast and a Personal survival budget.

When all this information is submitted the Start Up Loans Company will review your application.

For more information visit startuploans.co.uk.

 

New Enterprise Allowance

For those on benefits who plan to start a business, the government offers support and money via the New Enterprise Allowance.

What is on offer?

Money

This money helps cover start-up costs and a weekly allowance. You’ll get a weekly allowance worth up to £1,274 paid over 26 weeks. At the end of the period, you can also apply for a loan to help with extra business costs.

Weekly allowance

Your weekly allowance, which you do not have to pay back, is £65 per week for the first 13 weeks, and then £33 per week for the next 13 weeks. You cannot qualify for other jobseeking benefits at the same time, but it is paid as part of Universal Credit. You may get additional housing costs through Universal Credit.

Mentorship

The scheme provides you with a mentor who will help write up a business plan and develop your early ideas. They support you through your early stages of trading.

There have been complaints by those who have tried the scheme that they have not had much contact time with their mentor. This is important to bear in mind and probably suggests that you should feel confident gaining knowledge about business independently by researching.

Possible risks

You will be receiving the allowance instead of Jobseeker’s Allowance.

This has proved problematic for some people as you cannot apply for the loan until you are off JSA and there is the possibility that you may not be selected for the loan. This is risky as you are required to base your business plans on funding that you may well not receive.

As you have to sign off JSA to apply for the loan it is vital that you work closely with your mentor to ensure your business plan is viable. You’ll stay on JSA until your mentor signs off your business plan as viable – then you’ll switch over to the NEA weekly payments.

All in all the New Enterprise Allowance offers great help for those wanting to start a business but how it is administered can be problematic for anyone with no business experience to date.

Who is eligible?

You must:

• be 18 or over
• have a business plan
• you or your partner is on Universal Credit, Jobseeker’s Allowance or Employment Support Allowance
• or, be on income support as a lone parent.
• You don’t qualify, however, if you’re part of the work programme. 

How do you apply?

As soon as you are receiving one of the above mentioned benefits you can ask a Jobcentre Plus adviser to refer you to the scheme.

For more information go to the New Enterprise Allowance section on gov.uk or ask any questions you may have to your Jobcentre Plus adviser.

 

The Prince’s Trust Enterprise Programme

The Prince’s Trust offers a programme to help find out if self-employment is right for you, and offers a loan and training to help those starting a business.

Did you know….the television magician Dynamo began his career in magic being funded by The Prince’s Trust.

What is on offer?

Money

To provide loans, the Prince’s Trust works with the Start Up Loans Company.

The Prince’s Trust Enterprise Programme provides loans of up to £5,000. The loan must be paid back within three years and has a interest rate of 6.2%.

Mentorship

They also provide training and one to one mentoring to help develop your business ideas and to access other opportunities.

Who is eligible?

To be eligible you must:

• be between 18 and 30
• unemployed or working less than 16 hours
• live in the UK
• have a strong business idea

You can’t qualify if:

• you have a postgraduate degree
• you’re on a gap year
• you’ve been a graduate for less than six months
• you hold a professional qualification.

How do you apply?

To apply fill out an enquiry form on their website by clicking here. If you are successful you will be invited to a two hour information session which will tell you where to go from there. There are several stages to go through to develop your business idea before you can secure funding.

For more information on the Enterprise Programme visit The Prince’s Trust website.

 

Angel investment network

Started by two childhood friends from London in 2004, the UK Angel Investment Network is an online platform that connects people who are starting a business with a range of investors who may be keen to invest in their ideas.

How it works

If you’re starting a business, it’s not unusual to find yourself somewhat at odds with the eligibility criteria for government funding options or bank loans. Loads of entrepreneurs seem to fall between the cracks of these two extremes, which leave many feeling disheartened.

The UK Angel Investment Network is one of various alternatives that manages to bridge this gap quite nicely. The site offers users the opportunity to pitch their idea online to a massive pool of investors. The site currently has more than 1,344,904 registered members with 232,615 of these being investors and 1,112,291 entrepreneurs. They have 30 branches and cover 80 countries worldwide.

Since 2004, the network has managed to facilitate £200 million for some of the coolest startups in the UK and across the world.

They’ve also launched two other sites:

• Bricktribe – a platform specifically designed to introduce property investors and developers
• Seedtribe – a platform focused on growing the impact investment space for entrepreneurs and investors.

Who is eligible?

Pretty much anyone with a great startup idea and the dream of starting a business to those looking to expand their existing enterprises.

Just a quick scroll through the site shows business ideas that range from travel apps and boutique hotels, to autobiographical storytelling apps for families and halal dining clubs.

What is on offer?

Seed capital

Young companies and startups looking for initial financing, could expect business angels to provide seed capital of anywhere between £10,000 and  £40,000, depending on how good their idea and solid their pitch is. Not all investment necessarily comes from the same source, with various business angels often clubbing together to make up the amount needed.

Venture capital

What makes this network so great is the fact that it doesn’t stop at start-ups, but also offers opportunities for existing businesses with high earning potential to expand through further financial support. In these cases a group of investors within the network usually pool money in the £100,000-plus range for shares and a stake in the company’s operations.

Mentoring and support

In both cases, investors make themselves available to offer business expertise and contacts to help small businesses grow.

How do you pitch?

Draft a pitch

The most important part of the process is drafting a pitch that is both professional, and unique Keep in mind the sheer size of the Business Angels Network and that you will be contending with hundreds of thousands of other people who are starting a business of their own too. So, if communication isn’t your forte, get some professional help to write a pitch that is lively, informative, easy to read and, ultimately, attractive.

Sign up & submit your final pitch

Once you’re happy with your pitch, it’s time to head on over to the website, register your account and fill in the simple pitch form.

Identify and make contact with investors who you think would be a good fit

You may find yourself feeling a little disappointed when investors don’t start streaming in the moment your pitch goes live. Relax. Chances are you’re going to have to work a little harder than merely submitting your pitch. The site also offers you the opportunity to make contact with investors directly. Search for appropriate investors and send them a message with a link to your pitch. Don’t be shy and remember that confidence often just comes from faking it, till you start believing it.

Visit the Business Angel Investment Network website for further details.

 

Funding circle

The Funding Circle is a peer-to-peer lending marketplace that connects investors who want their money to go further with entrepreneurs who are working on starting a business or already have a small/medium-sized enterprise going. Since 2010, the online platform has facilitated the establishment of 54,000 businesses in the UK. In total, 5.8 billion has been lent to business owners. And, they say yes to a loan every 5 minutes.

How it works

Acting as the middleman, Funding Circle receives loan applications from small business owners through their website and helps those that are creditworthy get funding from investors, who simply use their online account to lend the money. The small businesses make fixed monthly repayments with interest, which then gets distributed to all the investors that lent to them.

Who is eligible?

Check to see if your eligible using their eligibility checker here. This won’t affect your credit score either!

What is on offer?

Unsecured loans – typically up to £250,000

These are highly flexible loans that can be used for a wide range of purposes, including working capital, expansion capital, asset purchases and more.

Secured loans – typically up to £1 million

These loans can be used for a wide range of purposes and will allow you to borrow more for your business.

Asset Finance 

If you’re thinking about purchasing a new asset or refinancing an existing one, then this could be the best solution for you. We can also fund the VAT if required.

Once you’ve made at least 3 to 6 months’ repayment on an existing loan, you will be able to apply for more.

How to apply?

Applying for a loan through Funding Circle is extremely quick and easy.

• Start off by signing up and completing an instant eligibility check
• Create a profile
• Provide the nitty gritty details of your business
• Get a quote, review it and pick the option that best suits your business
• If approved, you will receive a loan offer within 24 hours
• Once you’ve accepted, the funds will be transferred without issue

Visit the Funding Circle website to find out more.

 

Reward/donation-based Crowdfunding

In recent years, crowdfunding has proven to be one of the most popular ways to raise capital for starting a business.

How it works

As the name suggests, this financing method relies on a large number of people investing smaller amounts of money into a cause they support. This of course turns the traditional funding methods of asking a small number of people for large amounts of money, on its head.

This model is mostly online-driven, with those seeking funding setting up a profile describing their project on a website and those who want to back the cause, donating quickly and painlessly through the platform. Spreading the word via social media plays an integral role in gaining interest from people beyond your immediate circle of family and friends.

Who is eligible?

Crowdfunding is really open to anyone, but not everyone knows how to run a successful campaign.

Here are a few tips for getting the most out of your crowdfunding project:

• You need to have a very specific outcome. For example, you’re starting a business that will bring good hairdressers to the convenience of clients’ homes and need money to buy a kit for each stylist

• Set a specific and realistic funding target based on actual costs you’ve worked out

• Have a time limit to create a sense of urgency

• Offer your investors some kind of reward. There are two ways of doing this: either by connecting connecting your business to some traceable charitable outcome (for every £25 donation, you’ll give a free haircut to a specific homeless shelter) OR by offering small gifts in return (tote bags, t-shirts, sticker packs, discounts on services, tickets to your launch event are all popular options)

• Share widely on social media and ask your investors to do the same

Top sites to check out

• Kickstarter

• GoFundMe

• Indiegogo

• Patreon

While there are many crowdfunding platforms out there, these are by far the most prominent with proven track records of successful campaigns.

Of course, these sites also need to make their money, so will require a fee of between 4% and 6% if your project is successful.

 

Borrowing from family/friends

Although people often have a resistance to doing business with family or friends, sometimes it might be the only workable option you have when first starting a business.

Let’s look at a few things you should keep in mind:

Pros

Flexible terms

Friends and family members will often have a more lenient approach than banks or established investors. In many cases, they won’t expect you to pay back the money before it’s clear that you’re in a financial position to do so and may even allow you to do this interest-free.

Support structure

Sometimes the impersonal nature of financial institutions and big investors can be frustrating. When you get money from a loved one, this will often come with the benefit of personal interest and emotional support.

Building a legacy

It’s always special to be part of a friend/family member’s success story.

cons

Tax issues

It might be tempting to reach a loan agreement without the sorts of paperwork you may have to go through at the bank. However, it is in the best interest of both parties to set out the loan’s interest and repayment terms in a written agreement.

Possible abuse of familiarity

One of the awkward things about borrowing money from a close friend or relative is that you could be opening yourself up to criticism about spending habits. Be very careful about choosing the right person to do business with.

Feeling trapped by expectations

Of course you friends and family want your business to succeed – especially if they’ve invested money – however, don’t let this become an unnecessary source of worry and stress. It might be a good idea to schedule regular meetings where expectations can be managed on both sides.

 

Starting a Social Enterprise

This will probably not be applicable to most, but if you are starting a Social Enterprise then it is easier to get funding that you do not have to pay back through grants. A Social Enterprise operates much like a business, in so much as they compete to deliver goods and services and generate income through trade. However, the majority of profit is invested back into social and environmental causes.

What is a social enterprise?

The government defines Social Enterprises as “businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.”

Types of Social Enterprises include The Big Issue, the Eden Project and the John Lewis Partnership

As Social Enterprises are community based there is a lot more potential for free funding. To begin looking for grants try grantfinder.co.uk and biglotteryfund.org.uk. The Big Issue Invest also offers loans from £20,000 – £3m for Social Enterprises.

The 2014 budget also made social enterprises a more attractive prospect for potential investors. Up until the budget, investors would have gained more by investing in small private companies thanks to the tax incentives offered by the Enterprise Investment Scheme (EIS).

However the government is now encouraging investment in social enterprises by providing the social investment tax relief scheme, which gives individuals a tax reduction of 30% of their investment , the same as it is for the EIS. This should help level out the playing field and make investing in social enterprises more appealing.

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